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Moody's further downgrades Bulgaria's Fibank deposit ratings after ECB check

Author Mario Tanev
Moody's further downgrades Bulgaria's Fibank deposit ratings after ECB check Author: First Investment Bank Licence: All Rights Reserved

SOFIA (Bulgaria), August 2 (SeeNews) - Moody's Investors Service said that it has downgraded the long-term deposit ratings of Bulgaria's First Investment Bank (Fibank) [BUL:5F4] to B3 and changed the outlook to negative from stable.

In June, Moody's downgraded the long-term deposit ratings of Fibank to B2 from B1, maintaining a stable outlook.

The rating action follows the publication of the results of a comprehensive assessment of six Bulgarian banks by the European Central Bank (ECB), and reflects the ratings agency's view that the quality of Fibank's credit portfolio could pose a more significant risk to its solvency than initially estimated, Moody's said in a statement on Thursday.

The downgrade also reflects the magnitude of the capital shortfalls identified for Fibank, along with measures already taken and expected to be taken by the Bulgarian lender to address them.

The negative outlook reflects the fact that Fibank's financial performance over next 12-18 months could be affected by any potential additional loans classified as IFRS 9 stage 3 and stage 2, and resulting provisions.

Moody's Investors Service also said in its statement:

"RATINGS RATIONALE

-- RATING DOWNGRADE REFLECTS POTENTIAL HIGHER RISK IN THE BANK'S CREDIT PORTFOLIO

Today's downgrade mainly reflects the potential higher credit risk in FIBank's portfolio than previously estimated and therefore the higher risk to solvency from problematic exposures. Namely, Moody's considers that the AQR-adjusted nonperforming exposures (NPEs under the expanded European Banking Authority definition), which are significantly higher than those disclosed as of year-end 2018, could pose potential material additional risk to the bank's capital, as well as its profitability, than previously assumed.

The AQR, which is a prudential rather than an accounting exercise, included 78% of the bank's entire credit portfolio and 95% of the corporate portfolio and the AQR-adjusted NPE ratio for the bank's overall credit exposures was 44.1%, compared to the unadjusted NPE ratio of 19.1% as of year-end 2018. The additional NPEs were mainly identified in the corporate portfolio, where the AQR-adjusted NPE ratio was 56.2%, compared to 20.9% as of year-end 2018, and resulted in an upward adjustment in provisions needed for this portfolio.

Moody's already considered the risk to capital from a high level of problem loans and a significant amount of repossessed assets (mainly foreclosed properties) as the key driver for the FIBank's standalone assessment. However, this assessment was previously based on the last audited consolidated financials, whereby problem loans (stage 3 loans under IFRS 9) to gross loans were 21.9% as of end-2018 and coverage of problem loans (stage 3) by stage 3 provisions was modest at 44.5%. Higher problematic exposures, such as those identified in the AQR, mandate additional provisions, impacting profitability, and pose a further risk to capital in the interim.

FIBank's BCA continues to reflect its relatively strong preprovision earnings power and recovering bottom-line profitability with a net income to tangible assets of 1.8% in 2018 from 1% in 2017 and its predominantly deposit-based funding structure and sizeable liquidity buffers, which continue to be counterbalanced by its evolving corporate governance practices and the concentration of the bank's ownership that may give rise to key man risk issues.

A secondary driver for today's action are the capital shortfalls identified in the comprehensive assessment exercise, also considering actions already taken by FIBank and to be taken to shore up capital buffers along with a supportive macroeconomic environment in Bulgaria.

The AQR identified a capital shortfall of €125 million, mainly from the previously mentioned AQR-estimated additional provisions for corporate exposures. This exercise was complemented by hypothetical baseline and adverse stress test scenarios for the years 2019 to 2021. The capital shortfall for the baseline scenario was €136 million and €263 million from the adverse. A common equity tier 1 (CET1) capital ratio threshold of 8% threshold was used for the AQR and the stress test's baseline scenario, and a 5.5% CET1 ratio threshold was used for the adverse scenario. FIBank's 15.7% CET1 ratio as of the end of 2018 was used as a starting point.

According to FIBank's own disclosures, the bank had already secured €130 million in additional capital as of 30 June 2019, including €65 million in preprovision income in the first half of 2019, and that it plans to take measures to address the remaining €133 million through operating profit, de-risking of its corporate portfolio and other measures.

-- LOSS GIVEN FAILURE ANALYSIS DOES NOT RESULT IN ANY UPLIFT

Owing to the bank's relatively small proportion of loss-absorbing junior depositors (the bank is predominantly funded by retail deposits) and limited hybrid debt, the bank's deposit rating does not benefit from rating uplift as a result of the application of Moody's Loss Given Failure (LGF) analysis.

-- MODERATE LIKELIHOOD OF GOVERNMENT SUPPORT

FIBank's B3 long-term deposit ratings continue to incorporate Moody's assessment of a moderate likelihood of government support in case of need for the bank, which results in one notch of rating uplift. This support assumption is in line with the rating agency's approach of assigning government support to European banks with systemic importance despite the introduction of the Bank Recovery and Resolution Directive (BRRD), which limits a government's ability to support banks.

FIBank was the fourth-largest bank by assets and deposits in Bulgaria as of the end of 2018. The reported market share of deposits in Bulgaria was 9.6% as of end-2018. Furthermore, Moody's support assessment is backed by the track record of support for FIBank, which received liquidity support from the authorities in 2014.

-- NEGATIVE OUTLOOK REFLECTS UNCERTAINTIES IN THE BANK'S FINANCIAL PERFORMANCE

The negative outlook reflects that any additional IFRS stage 3 or stage 2 loans recognised in the bank's accounts may require further provisions and impact the bank's financial performance over the next 12-18 months, including dampening net income and the pace of the de-risking of the credit portfolio.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook on FIBank's deposit ratings, there is currently limited upward rating pressure. The outlook could change to stable, however, if FIBank is able to address the capital shortfalls identified through private means, while significantly reducing asset risk in its portfolio through a material decline in problem loans and real estate assets, and significantly improved provisioning coverage of problematic exposures.

A change in the bank's liability structure, such as through the issuance of senior or subordinated and low-trigger hybrid debt, could lead to changes in Moody's LGF analysis, resulting in an uplift to the deposit ratings.

The bank's ratings could be downgraded if the bank does not address the additional capital buffers identified within the coming quarters and if its problem loans do not decline and the provisioning coverage on problematic loans does not improve materially during this period. A deterioration in the bank's capital levels and profitability, or a decline in liquidity and deposit outflows would also lead to a rating downgrade.

Changes in the bank's liability structure, mainly from an increased reliance on secured funding, could result in a downgrade of the deposit ratings. Finally, a lower likelihood or capacity of the Bulgarian government to support FIBank, in case of need, may also result in a downgrade of the deposit ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FULL LIST OF ALL AFFECTED RATINGS

Issuer: First Investment Bank AD

..Downgrades:

.... Adjusted Baseline Credit Assessment, Downgraded to caa1 from b3

.... Baseline Credit Assessment, Downgraded to caa1 from b3

.... Long-term Counterparty Risk Assessment, Downgraded to Ba3(cr) from Ba2(cr)

.... Long-term Counterparty Risk Ratings, Downgraded to B1 from Ba3

.... Long-term Bank Deposits, Downgraded to B3 from B2, Outlook Changed To Negative From Stable

..Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Ratings, Affirmed NP

.... Short-term Bank Deposits, Affirmed NP

..Outlook Action:

....Outlook Changed To Negative From Stable"

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